We came across a bullish thesis on Twilio Inc. (TWLO) on High Growth Investing’s Substack by Stefan Waldhauser. In this article we will summarize the bulls’ thesis on TWLO. Twilio Inc. share was trading at $58.94 as of Sept 11th.
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Twilio, the renowned Silicon Valley SaaS company founded in 2008 by Jeff Lawson, has experienced a rollercoaster ride since its successful IPO in 2016. Initially a standout in the Communications Platforms as a Service (CPaaS) sector, Twilio’s stock surged to over $400 by mid-2021 before crashing to $50, highlighting the volatility typical of tech stocks. The company’s core innovation was its cloud-based communication platform, which allowed developers to integrate telephony and messaging into their applications seamlessly, revolutionizing the market with its simple API and scaling capabilities.
Despite early success, including a robust IPO and aggressive expansion through high-profile acquisitions such as SendGrid and Segment, Twilio faced challenges. The acquisitions, while expanding Twilio’s reach, led to significant dilution and inflated intangible goodwill. These deals, once seen as strategic moves, now appear costly in retrospect, particularly as integration difficulties and underperformance in the acquired assets emerged. The departure of founder Jeff Lawson at the end of 2023 marked a pivotal shift, with Khozema Shipchandler, the new CEO, tasked with steering the company back to profitability.
Shipchandler, previously Twilio’s CFO, is focused on rectifying the company’s trajectory by reassessing and restructuring its acquisitions, particularly Segment. The decision to retain and better integrate Segment aims to enhance profitability by mid-2025. While Twilio’s revenue growth has slowed to single digits, its focus on improving profitability has been promising. Notably, the company’s free cash flow margin has surged to nearly 20%, with a significant reduction in operational losses.
For 2024, Twilio projects modest revenue growth, expecting to reach approximately $4.4 billion, and anticipates a substantial increase in free cash flow, ranging from $650 million to $675 million. Despite this, Twilio’s balance sheet remains burdened by $5.2 billion in intangible goodwill, posing a risk of future write-downs. The company’s strong cash reserves and debt levels, however, provide a cushion.
An aggressive share buyback program initiated in 2023 has already repurchased $2.2 billion worth of shares, with plans for an additional $0.8 billion by year-end. At a current share price of $60, Twilio’s enterprise value stands at $7.8 billion, significantly down from its peak valuation of $66 billion. This suggests a potential undervaluation, particularly when considering the company’s improved cash flow metrics. With the stock trading at less than 10 times free cash flow and a recovering share buyback program, there’s optimism for a price rebound. A potential goodwill write-down could provide a fresh start in 2025, setting the stage for a significant recovery.
Twilio Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 54 hedge fund portfolios held TWLO at the end of the second quarter which was 45 in the previous quarter. While we acknowledge the risk and potential of TWLO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TWLO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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